Mr Deepak Satwalekar, former Managing Director & CEO of HDFC Standard life , agreed with the view expressed by Mr P A Balasubramanian, former member of IRDA, that Unit-Linked Insurance Plans (ULIPs) of shorter duration -- e.g., of less than 10 to 12 years are not very beneficial to policy holders, mainly because of the burden of high administrative costs and commissions in the initial years.
"Insurance companies in India should design and offer the ULIPs and other insurance products of more than 15 to 20 years to policy holders. It is also necessary that they replace the commission-based agency system with the 'advisory fee' based system, as in the UK," he said.
Mr Satwalekar, Mr Balasubramanian, Mr Gaurab Parija, National Sales director of Franklin Templeton AMC, and Mr Shailesh Haribhakti, Managing Partner of Haribhakti & Co, were participating in a summit on " ULIP: The Controversy! What Next?", organized jointly by Indian Merchants; Chamber and Pune-based Insurance Academy at IMC's Walchand Hirachand Hall on April 30.
IMC's President-elect Mr Dilip Dandekar welcomed and felicitated the speakers. IMC's past president, Mr M N Chaini, spoke on the need to impart education and training to youths for acquiring specialized knowledge and business skills in the insurance sector. Mr R N Jha, Co-Chairman of IMC's Insurance Committee, introduced the Summit's theme for discussion. Prof. Kshitij Patukale, Director of the Insurance Academy, summed the summit's deliberations.
Mr Dandekar said that recently SEBI banned 14 private insurance companies from procuring investments through their ULIP plans; but the insurance watchdog, IRDA ruled that the ULIP plans were safe and sound. Also the SEBI regulatory authorities insisted that all direct or indirect investments in the security market were under the purview of the SEBI Act. Disagreeing, the IRDA maintained that ULIP was an insurance product and an extension of the insurance contract, and therefore did not come under the scope of SEBI Act.
Presently, ULIP had about 70 % share of new insurance business premium. Policy holders invested more than Rs.26,000 crore in the ULIP products of private insurance companies ."In view of the large number of investors, and of the magnitude of investment involved, the IMC hopes that the summit would help clarify the murky issues and remove the fears of ULIP investors," he said.
Mr Chaini said, "It is necessary that ULIP investors know which independent authority -- whether SEBI or IRDA -- legally controls the ULIP product. The recent ban on ULIP imposed by SEBI and the reaction of IRDA have done little to remove the confusion and apprehensions from the minds of policy holders and agents. IMC's summit seeks to clarify the fundamental issue of whether the ULIP is an investment or a risk cover."
Most speakers pointed out that SEBI and IRDA were in reality fighting a turf battle in the Bombay High Court and Supreme Court. "Certainly, the raging ULIP controversy has helped in focussing public attention to the issue. It has thrown light on a lot of dark and shady issues, which lacked clarity and transparency. Of course, the unseemly public controversy about the fate of ULIPs could have been avoided by the Union government by initiating a mature process of parleys between the various regulatory bodies in the administrative corridors," they opined.
Mr Satwalekar said that over the years, ULIP had become a crucial product of insurance solutions. ULIP was a combination of pure insurance contract and investments in securities and the investment was administered by a mechanism akin to mutual funds. It was acclaimed as a new age insurance product which allowed policyholders to select their investment and risk option, tailor-made to their needs. It also helped investors get tax sops.
"SEBI's decision has caused panic among the policy holders. A large number of policy holders are either lapsing or surrendering their policies. ULIP, as an insurance product, took birth nine years ago. Why did SEBI wait for so long to ban it? " he asked.
"It is all a myth that ULIP is an investment product, not an insurance product ; it is a myth that ULIP is an expensive and opaque product. It is also a myth that the Mutual Fund products are cheaper than ULIP; and that there is rampant mis-selling of ULIP. It is a myth that the equity cult in India was started by mutual funds; and that mutual funds need a level playing field with insurance companies," Mr Satwalekar asserted.
Mr Balasubramanian sought to justify SEBI's decision to ban ULIPs on the ground that short term insurance products caused huge losses to policy holders. Drawing from his rich actuarial expertise, he explained that a modest annual investment of Rs 10,000 in a ULIP-like insurance product would lead to a heavy loss during the first four years. The investment would begin yielding a paltry benefit only from the 5th year. Real benefit would come to the policy holders only from long-term policies of over 20 to 25 years.
He said that there were many gaps in the regulatory guidelines for ULIP sale in India, where such products were new. "Whether the insurance companies or the mutual funds, their guiding principle must be that they treat the investors in a fair and just manner. They must clearly and transparently lay down the criteria of pricing, valuation, error correction, costs and commissions etc. UK has a code called 'Complete Guide for Good Management & Fair Treatment of Customers.' India must adopt such a code,” he said.
Citing the points of contention, he said ULIPs bored holes into the investors' pocket mainly because of the heavy burden of commission cost, high costs of issuing policies, maintenance and operational costs. "In 2008, the cost of commission borne by policy holders was a staggering Rs 8,900 crore , which was 18% of the insurance funds mobilized!”
He said that 'mis-sale' of insurance products was very rampant in India, because of high commission paid to the agents. Neither the insurance companies, nor the IRDA had any machinery to check this evil. "But in UK, they have insurance inspectors, who look into each and every policy sold by the companies," he added.
